GM: Running on Empty?
Founded in 1908, General Motors Corp. (GM) is truly an iconic American corporation. From 1931 through 2008, GM was the world's largest automobile manufacturer, and in 1955, it became the first company in any industry to report more than $1 billion in revenues. GM's market share peaked at 51 percent in 1962. GM's domination in the market was such that many recommended the company be subject to scrutiny under antitrust laws. In 1971, former President Lyndon Johnson made the statement “now what's good for General Motors really is good for America.”1
GM's net income reached an all-time high of $6.7 billion in 1997, and the automaker continued to generate positive net income through 2004. In 2005, things began to change. GM reported a net loss of more than $10 billion and continued to post losses through 2008, with a loss of almost $31 billion in that year. (GM's cash flow from operations in 2008 was a negative $12 billion.) A summary of various measures of GM's financial condition for the six-year period from 2003 through 2008 is presented inGM Exhibit 1.2
GM EXHIBIT 1
Summary of Financial Information: General Motors Corp. (amounts in millions)
Source: General Motors Corp. 2003–2008 10-K reports.
Because of concerns with the ultimate impact of GM's financial struggles on the world economy, GM received $13.4 billion in government loans in December 2008. President Barack Obama's administration pledged interim financing to allow GM to develop a restructuring plan, requested then-CEO Rick Wagoner to resign, and announced a plan to replace at least 6 of the 12 members of GM's board of directors. All of these events occurred in a market in which the economic conditions sharply decreased demand for automobile purchases. Not surprisingly, GM's stock reached a low (at that time) of $1.45 per share on March 6, 2009. (With one brief exception, GM's stock traded between $30 per share and $82 per share between 1983 and 2008.) GM's high, low, and closing stock prices for the period 2003–2008 are summarized in GM Exhibit 2.
GM EXHIBIT 2
Annual High, Low, and Closing Stock Prices: General Motors Corp.
Source: Wharton Research Data Services.
In its March 4, 2009, report on GM's financial statements, GM's auditors (Deloitte & Touche) concluded that GM's financial statements were fairly presented in conformity with GAAP. However, Deloitte expanded its report to include the following paragraph to recognize uncertainties regarding GM's ability to continue as a going concern:
The accompanying consolidated financial statements for the year ended December 31, 2008, have been prepared assuming that the Corporation [GM] will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Corporation's recurring losses from operations, stockholders' deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In April 2009, GM's Chief Executive Officer Frederick “Fritz” Henderson (who succeeded Rick Wagoner) created a restructuring plan to save GM. Under this plan, the debt owed to unsecured bondholders, the United Auto Workers, and the U.S. government (which totaled $74.4 billion across the three groups) would be reduced by $44.6 billion in exchange for a 99 percent interest in the emerging company. In addition, the terms of this plan called for the closure of 42 percent of GM's dealers.3
On June 1, 2009, the once unthinkable happened: GM filed for Chapter 11 bankruptcy. Under the terms of the bankruptcy plan, two entities were created: an “old GM” (subsequently named Motors Liquidation Company), a public company that owns four brands in the process of being phased out (Hummer, Saab, Pontiac, and Saturn), and a “new GM,” a private company that is majority owned by the U.S. government (a 60% stake), with the Canadian government (11.7%), United Auto Workers (17.5%), and GM's unsecured bondholders (10%) owning large minority stakes. The new GM (known as General Motors Co.) received the Buick, Cadillac, Chevrolet, and GMC brands. General Motors Co. emerged from bankruptcy and began its operations on July 10, 2009, just 40 days after the filing. A brief profile of GM (the combined entity prebankruptcy) and General Motors Co. (the new GM that emerged postbankruptcy) is shown in GM Exhibit 3.4
GM EXHIBIT 3
Profile of General Motors Corp. and General Motors Co.
A BOOST FOR THE AUTO INDUSTRY
On July 1, 2009, the U.S. government announced the Car Allowance Rebate Program (popularly known as the “Cash for Clunkers” program) to provide incentives for the automobile industry. Initially, $1 billion was appropriated for this program, but overwhelming demand from consumers resulted in an additional $2 billion allocation when the original funds were exhausted. More than 690,000 transactions were rebated under this program, 17.6 percent of which were for General Motors Co. automobiles.5 Despite this program, GM's 2009 retail sales were down 17 percent from 2008.
In November 2010, GM returned to public company status with an initial public offering that raised $23.1 billion, one of the largest such offerings in the history of the United States6; GM's stock price closed at $34.19 that day. Deloitte & Touche's opinion on GM's 2010 financial statements (issued on March 1, 2011) concluded that GM's financial statements were presented in conformity with GAAP and made no reference to the going-concern uncertainties that GM had previously faced. GM has returned to profitability with reported net income (before noncontrolling interests and preferred dividends) of $6.2 billion, $9.2 billion, and $6.2 billion in 2010, 2011, and 2012, respectively; however, as of mid-2013, its stock price had risen only slightly above its public offering price, to $34.96 per share. On June 5, 2013 (less than four years after its bankruptcy), GM rejoined the S&P 500, replacing Heinz following its acquisition by Berkshire Hathaway.
1. Reviewing GM's financial information in GM Exhibit 1 and its stock price in GM Exhibit 2, when do you first see signs of GM's impending financial distress?
2. In referencing professional standards, what factors should auditors consider in evaluating potential going-concern uncertainties?
3. Considering your response to questions 1 and 2, do you believe that the going-concern uncertainty was warranted? Do you believe that Deloitte & Touche should have issued a going-concern opinion prior to 2008?
4. What economic factors existing in the United States during 2008 might have accelerated Deloitte & Touche's decision to issue an audit opinion modified to disclose going-concern uncertainties?
5. Do you believe that the events immediately following GM's bankruptcy alleviated the concerns that led to the issuance of the going-concern uncertainty? What issues would auditors need to consider in evaluating the ability of General Motors Co. (the new GM) to continue as a going concern?
6. Many companies believe that a going-concern opinion is a self-fulfilling prophecy (that is, when a company receives a going-concern opinion, customers will not purchase products with warranties, suppliers will not provide short-term credit, and investors and creditors will not invest or loan). Would GM's going-concern opinion influence your decisions regarding either purchasing a car from GM or investing in GM's stock? Is a going-concern a self-fulfilling prophecy?